The Effects of Competition-Based Public Policy on Contractual Arrangements

When competition is naturally limited, policymakers craft regulation to obtain effects similar to those that would have occurred in the presence of competition. In many instances, regulation of this type is not successful in overcoming market failures. We rely on property rights theory and transaction cost theory to predict when state-level policy statements will actually lead to a redistribution of benefits at the city level. We test this theory in the context of cable television franchise renewal agreements-a setting historically resistant to competition. We look to the language of the franchise agreements for evidence of concessions made by the cable operator to the city, and using a difference-in-difference estimator, we find that pro-competitive regulation translates into concessions to the city. However, a credible threat of competition embedded in regulation is not enough to curb opportunism associated with monopoly supply in cases of large franchisees; larger cable operators are at least 60 percent less likely to offer more favorable terms of trade. However, consistent with transaction cost predictions, asset-specific investments by the cable operator do curb opportunism; there is a 51 percent increase in the odds of a franchisee offering more concessions for a 1 standard deviation change-about 1,020mi of the plant. These findings are important for those involved in crafting policy at all levels of government as well as for researchers interested in understanding the role of long-term contracting and the use of hybrid mechanisms such as franchise agreements in contemporary governance.